'Sensex may hit 37,500 by Dec-end; 5 stocks to buy after the recent fall'

Small and midcap indices have corrected around 25-30 percent, while some stocks have plunged over 50 percent. Vivek Ranjan Misra, Head-Fundamental Research, Karvy Stock Broking feels that the correction in mid and smallcap stocks is nearing their bottom as negative sentiment has caused a deep correction in these stocks.

Karvy has a year-end Sensex target of 37,500. Misra is bullish on cyclical sectors such as capital goods and discretionary consumption themes like automobiles and banks.

Edited excerpts:

Q) Many stocks have seen a double-digit correction in 2018, especially in the small and midcap space. Does it makes sense to catch the falling knife? Do you think money can be made in the long run if someone invests in quality stocks?

A) The Nifty is currently trading at 12-month forward price-to-earnings ratio of 18.3 times, which can hardly be described as cheap. At this level, valuations are not a constraint in markets moving higher. There is money to be made in Indian markets, especially for investors with a long time horizon. The reasons for being optimistic here is because: 1) Economic growth is reviving; 2) Gross fixed capital formation has recovered in the last two quarters (14.4 percent YoY growth in Q4 FY18); and 3) Capacity utilisation is rising. These three factors bode well for a pick-up in corporate earnings as well as a pick-up in return on equity.

related news Low base of GST to boost Q1 earnings; Nifty earnings growth seen at 21% Sensex above 36,000, Nifty reclaims 10,900; these 5 factors driving market uptrend MUST READ: Full text of Raamdeo Agrawal's letter to investors Q) What will drive Indian markets in the next six months of 2018?

A) The following factors will drive the markets: 1) Economic recovery and its impact on corporate earnings; 2) Political developments in India, especially upcoming state elections; 3) Ongoing process of resolution of non-performing assets and recapitalisation of the banking sector; 4) The path of dollar-rupee and oil prices. Our year-end target for the Sensex is 37,500.

Q) What should be the criteria for selecting quality stocks at current levels?

A) At this stage, we prefer stocks that are geared to the economic recovery. We prefer cyclical sectors such as capital goods, discretionary consumption themes especially automobiles and banks.

Q) The recent slide in the dollar-rupee caused nervousness on D-Street. Is the currency headed for lower levels in the next six months of 2018?

A) The rupee depreciation should be seen largely in context of the depreciation in emerging markets (EMs) and strengthening of the dollar. This is on account of higher US rates. For the Indian rupee, a few additional factors are driving this trend, the first is the risk of a widening current account deficit on account of oil prices. Secondly, with general elections approaching, political risk is rising. While a big part of the move is probably done, we expect the currency market to remain weak.

Q) There is an FII exodus. What is pushing FIIs out of Indian markets?

A) While weakness in asset markets needs to be seen as a general weakness in EM markets. For instance, while EM equities are down 17 percent compared to the recent peak in the same period, Indian markets have declined 6 percent. Result from general elections not to the liking of the market could be an additional factor. Inflows from foreign institutional investors (FII) are unlikely to revive in a meaningful way in 2018 and the market will be largely driven by domestic investors.

Q) Sensex and Nifty are up 4 percent for 2018 but small and midcap indices are down double-digits. Can we say that the broader market is in a bear market?

A) In the US, a fall of 20 percent or more from the peak is defined as a bear market. For more volatile emerging markets we should be using a higher figure like 30 percent. The midcap index is down 16 percent and the smallcap index is down about 21 percent compared to a decline of 7 percent in the BSE 500. The decline in smallcaps is significant and painful but I don��t think the broader market is in a bear market.

Q) What would you advise investors holding smallcap and midcap stocks in their portfolio �� buy on dips, hold or sell-out on rallies?

A) The strategy has to be stock specific, with no single style being the right answer. Overall, midcaps and small caps are a hold.

Q) It is hard to find value in markets because even quality stocks are falling like nine pins. Which stocks do you think are value buys after the recent decline?

A) Here is a list of top 5 stocks that investors can buy after the recent decline:

Bharat Electronics

Annual order inflows is expected at Rs 12,000-13,000 crore for the next two years. Execution of electronic voting machine and voter verifiable paper audit trail in H1 FY19 will hold the key. The mix is in favour of non-defence related orders with inflows improving. Moreover, execution of defence orders could also witness a pick-up.

BEL has almost 40 percent market share in the defence electronics market and is available at 14 times FY20e earnings per share, which is lower than its 5-year average of 18 times. The price correction of almost 45 percent seen in the last 6 months, due to fear of lower margins, seems overdone in our view. The stock has fallen over 40 percent in 2018 so far.

 

Apar Industries

The company is seeing healthy demand for conductors, transformer oil, auto lubes and power cables. New initiatives like molten metal agreement, copper conductor and harnessing business of railways would driving growth of individual segments. Passing on of increased raw material prices will place Apar Industries at 7-8 percent margin levels. The stock has fallen nearly 19 percent year-to-date.

Jain Irrigation Systems

The government��s thrust on irrigation and infrastructure developments and strong global order book are key factors that are likely to act as key tailwinds for the stock. Going forward, a thrust on irrigation, urbanisation and infrastructure building should support valuations. The stock has fallen nearly 38 percent in 2018.

Talbros Automotive Components

The flagship manufacturing company of the Talbros Group was established in 1956 to manufacture automotive and industrial gaskets in collaboration with UK��s Coopers Payen. Talbros stands proud and tall as a mother brand of gaskets and heat shields, forgings, suspensions systems and anti-vibration components and hoses. Talbros Group has formed strong partnerships with global giants. Improving automotive demand, Bharat Sanchar VI, robust order book line up and increase in revenue visibility should act as opportunities. The stock has fallen over 15 percent in 2018.

Gujarat Mineral Development Corporation

GMDC is a strong buy even at current levels on strong earning trajectory and robust operating performance. Strong demand for lignite, capacity addition and traction in power business are among key factors which should go in its favour. The stock has fallen nearly 38 percent so far in 2018.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. First Published on Jul 10, 2018 02:24 pm